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At Issue: Surviving California Municipal Bankruptcies



July 23, 2012 By

The systemic problem of declining revenues and increasing costs requires a sharp knife and a tolerance for blood.

Last month, California cities — under assault by busted revenues, soaring pension costs and a state grab of economic development funds — got another shock, as the Government Accounting Standards Board (GASB) changed the rules on pensions. The discount rate — the rate that state and local government pension funds can expect to earn — has been lowered. That means, essentially, that pension funds that have predicted an 8 percent return on pension fund investments can now only predict a 5 percent return, reflecting new economic realities and downgrading anemic pension funds into intensive care.

In past weeks, Mammoth Lakes, Stockton and now San Bernardino have declared bankruptcy. Compton is next, according to news reports. Even Los Angeles officials are using the "B" word, with Chief Administrative Officer Miguel Santana warning that the city is in "crisis mode" with a $200 million-plus budget deficit, according to a Los Angeles Times article.

Information technology — which has over the years increased efficiencies and helped cities meet their full-service obligations in the face of relentless staff and budget cuts — is still a resource for local government, but the systemic problem of declining revenues and increasing costs requires a sharp knife and a tolerance for blood.

In 2010, one of the first of the Golden State's cities to go under the bankruptcy knife was Vallejo, a city of 116,000 in the San Francisco Bay area. Vallejo has since emerged with lowered debt, but with the same pension obligations to retired or current employees and a $10 million legal bill. Ironically the lesson of Vallejo in 2010 helped awaken other cities to the necessity for harsh measures that would have been unthinkable otherwise. San Carlos, Calif., was one of those.

San Carlos Survival Strategy

According to San Carlos Assistant City Manager Brian Moura, financial benchmarks and metrics have always been key to briefing the City Council. In 2010, following Vallejo's bankruptcy filing, a comparison between Vallejo and San Carlos led to what Moura calls an "A-ha moment."

San Carlos police and fire expenses were about 50 percent of general fund budget, but a few years back they began climbing. "By the time we convinced the Council to start looking at delivery alternatives and shared services," said Moura, "we were well over 60 percent and heading toward 70. And when you get to 70 percent, you’re in 'Vallejo land.'" That comment got the City Council's attention. "Everybody said, 'Whoa, wait a minute, what did you say?'”

The obstacles were formidable. The biggest expenses were police and fire protection, and the biggest sources of revenue always have been sales and property taxes. Property taxes did the heavy lifting as a predictable source of revenue that slowly increased as property values rose. That changed dramatically with the housing crash, pulling the rug of financial stability out from under many cities. Then, when California abolished redevelopment agencies, cities lost millions of dollars per year in revenue, and also lost the tools to spur economic growth. San Carlos voters turned down a tax increase measure and that was that. Or so it seemed.

"If you can’t do redevelopment, because the state took the money, and you can’t pass a revenue measure, you are left with looking at who else could deliver the services," said Moura. The city began with some pilots, outsourcing parks maintenance and payroll, and gained some confidence that they could reduce costs without cutting service. That was important, he said. "The public didn’t want us to raise their taxes and they didn’t want the services to drop." Other options were negotiable, at least with the public, which seemed less concerned about how the service was obtained. To Moura, that was tacit permission to explore other options. Most objections, he said, came from outside the area from vested interests worried that if San Carlos was successful, things might change for them as well.

Police dispatch was next. The city contracted with nearby city Menlo Park to do its police dispatch, and saved about $250,000 per year by teaming up. "They got new revenue, we saved on costs" said Moura. Later the county Sheriff's Office took over the dispatch, saving an additional $157,000. "So now we are dispatched by the county and saving over $400,000 a year," said Moura, a significant amount for San Carlos.

Policing was outsourced to the county Sheriff's Office as well. Officers and patrol vehicles were part of the deal — only their uniform patches changed. And according to Moura, service levels were unchanged. The payoff? The city saved $2 million per year. While Moura says he hasn’t heard of larger cities doing something like that, the California cities of Millbrae and Half Moon Bay also contracted with the Sheriff's Office for policing, and Moura says that Pacifica is in negotiations.

Moura said San Carlos had 21 different options for fire service, which was then being run jointly with another city. "We re-established a city fire department and hired the neighboring city of Redwood City to manage it." He calls it a "federated or hybrid model." The savings came from sharing the high-ticket executive strata and resetting salaries to match the fact of working for a smaller department. "We pay for part of the fire chief and they pay for the other part," he explained. The city is still in startup mode now, and is broadening the contract for flexibility — managing a kind of virtual partnership.

"Today we’re spending about $6.4 million for fire," said Moura. "If we were still in the former situation we had, we’d be spending $8.5 million, so we’ve saved $2 million a year just on fire, and another $2 million a year on police. In a city where your annual budget is around $28 million a year in the general fund, that’s significant [savings]. So if you look at these alternate service delivery approaches you can make big headway." He said that police and fire costs are now about 50 percent of general fund budget again, and today the city has a modest surplus of $80,000 to $90,000.

The Small Stuff

Moura said other cities ask how San Carlos handled its fire and police situation, and passed over other less-dramatic initiatives intended to save money. For example, the city reviewed all software and services contracts and gained concessions from vendors who didn't want to lose annual maintenance fees, and went outside-the-box to obtain secure Internet service: switching from microwave to Comcast cable, which was just beginning to provide services to business and government.

Two different vendors were providing document management, agendas and video. One vendor gave the city a package deal that Moura called "aggressive," and took over those functions. The city had four IT positions. When one staff member left, rather than refilling the position, the city hired desktop and project support on an as-needed basis. The costs were a bit less overall, flexibility was improved and the skill sets could be customized to what was needed. And the city is investigating Office 2013 that offers software as a cloud service.

Flexibility is the key and the city is renting out office space to an agency that wants to purchase IT assistance as well. San Carlos does financial services for the countywide association of governments, provides recreation services for Half Moon Bay, Calif., and has entered into some other innovative agreements. Moura says that people most often think of small cities as service users, not providers. "But small cities can be a service provider," he said, "if you have the talent and the vision."

Moura, quoting some recent studies, says he thinks the economy will rebound slowly. Change can be stressful, he said, but waiting for things to revert to normal won't work this time, and other cities will need to face this "new normal."


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